Fortress attracts initial capital for second Japan fund

New York-based Fortress Investment Group is poised to hold a first closing of approximately $200 million for its second Japan-focused real estate opportunity fund.

The firm currently is marketing the Fortress Japan Opportunity Domestic Fund (FJODF) II, through which it hopes to attract ¥100 billion (€960 million; $1.3 billion) in commitments, and it is understood to already have garnered significant support from investors after producing strong returns for its previous Japan-focussed opportunity fund, which is almost fully invested.

According to marketing materials, Fortress is going to continue making investments in debt assets, often with a view to controlling the underlying real estate. This is in keeping with the investment strategy of its first Japan-focused real estate fund, Fortress Japan Opportunity Domestic Fund, which closed on ¥80 billion in June 2010 and is understood to already have returned significant capital. While still in the early stages of realising its investments, certain of the fund’s investors said over the summer that the vehicle was “on course to generate IRRs north of 30 percent”.

The marketing material echos the sentiments of Japan head Thomas Pulley, who said in a PERE interview prior to the second fund’s launch: “Right now, the debt is driving the opportunity, and it takes both the ability to figure out how to get to the asset in the most cost-efficient, expeditious manner possible and then also what to do with the asset.” To read the full interview with Pulley and other members of Fortress’ credit funds business, which is spearheading much of the firm’s current real estate activity, including FJODF II, click here.

Relying on a combination of its own proprietary information and research from rating agency Moody’s Investors Service, Fortress has singled out more than $60 billion in investment opportunities in Japan currently. Within that, the firm believes there is ¥2.9 trillion of CMBS and structured finance products potentially available, as well as ¥990 billion worth of loans to distressed funds and REITs that could be up for grabs.

In further describing the fund’s investment perspective , Fortress pointed to Moody’s estimated loan default rate in Japan of 28 percent this year, up dramatically from just one percent in 2008 and significantly higher than the 9 percent loan default rate expected on US soil this year.  Furthermore, only 24 percent of the loans made to Japanese real estate and maturing in 2011 are expected to be repaid.

One observer described the competitive landscape for such investments as somewhat barren: “There’s just a huge refinancing void taking shape,” he said, “and not too many folks chomping at the bit to make [new] loans.”

With Goldman Sachs’ Real Estate Principal Investment Area and Lone Star Funds, traditionally among the largest private equity real estate firms active in Japan, pulling back from previously large exposures to the market, Fortress’ rivals in the opportunistic space have become few.

Among those also seeking opportunistic returns from Japan include Secured Capital, which also is seeking about $1 billion for its fifth opportunity fund, and MGPA, which is investing from its $3.9 billion MGPA Asia Fund III vehicle. Both of those firms, however, also are seeking core-plus strategies in the country, as are firms like AXA Real Estate Investment Managers. Nonetheless, Fortress has made no secret of its loyalty to pursuing opportunistic returns and is targeting between 17 percent and 20 percent for FJODF II.

Fortress’ early capital raising successes in Japan mirror to some extent its fundraising efforts in the US, where it has raised more than $100 million for its first global real estate opportunity fund, Fortress Real Estate Opportunities Fund. The vehicle, which is expected to attract approximately $1 billion in commitments, is to be used to make both equity and debt investments. During PERE’s interview, head of the credit funds business Peter Briger said: “Today, you’re looking at $2 trillion worth of assets publically announced for sale, based on book value of the outstanding principal balance, and we think that number grows.” He described the world’s “truly at risk credit” as the “dominating part of the opportunity set for us.”

Fortress declined to comment on its fundraising activity.